PPF assesses out-of-cycle valuations for schemes affected by 'money purchase' definition

The Pensions Act 2011 sought to alter the definition of money purchase to ensure defined contribution schemes that included some form of underpin or income guarantee to members, so could build up a deficit, should be regarded as defined benefit or hybrid. 

These out-of-cycle valuations will ensure that affected schemes’ levies take proper account of the altered risk

Stephen Rice, PPF

Some schemes would then fall under the protection of the PPF, which could increase its risk.

The PPF requires levy-payers to complete a section 179 valuation every three years. The consultation is seeking to gauge the extent to which it might have to use its powers to call upon affected schemes to complete an out-of-cycle valuation.

Chief actuary Stephen Rice said that while the change means more members will benefit from its protection, it needs valuations to assess that risk.

“Our consultation proposals provide a reasonable and considered approach to when the change in risk is material and schemes will need to do a valuation sooner than normally,” Rice said. 

These schemes have been advised by legal experts to choose an effective date for a scheme funding valuation within 12 months of the changes coming into force, as they are expected to have to pay levies from 2015/16, and to review any previous employer debt events or wind-ups. 

Tim Smith, senior associate at law firm Eversheds, said the PPF’s decision to take a “pragmatic approach” will be a relief to those schemes affected, as they will only be required to undertake an out-of-cycle valuation where there is a material increase in their PPF liabilities that are not reflected in the scheme’s s179 valuation.

However, on the change in definition, Smith added: “The introduction of the new statutory definition of money purchase benefits is a major headache for all schemes with money purchase benefits.”  

Andy Lewis, senior associate at Hogan Lovells, said this is a signal of how the “complex” new regulations will start having a practical impact on many schemes in the near future.  

“It looks like all PPF-eligible schemes can expect a letter from the PPF prompting the trustees to consider these issues with their actuary,” he said.

However, he noted that while the consultation suggests out-of-cycle valuations will only be required where the scheme's liabilities have changed materially, there is likely to be further debate about the threshold and implementation. 

Lewis said the firm currently has “more than a handful” of pension fund clients looking closely at this issue. 

He said some of these arrangements may be classified as hybrid under new Budget regulations, but that government was still consulting as to how hybrid plans would be treated. 

“These types of scheme will need careful thought when we know the government's position,” Lewis added. 

Mike Fenton, principal at consultancy Mercer, said he expected the number of newly eligible schemes to be in the tens rather than hundreds, but they will need to perform an s179 valuation ahead of March 31 2015. 

He added, however, that those defined as 'increased liability schemes’ will require further investigative work by trustees and actuaries. 

“We do not believe that many schemes will be required to do an out-of-cycle valuation due to the materiality threshold,” Fenton said, “though some will see an increase in their s179 liabilities due to the inclusion of additional liabilities.” 

The consultation closes on July 9 and is available on the PPF’s website.